Dividend Per Share
A dividend per share (DPS) is an amount of money paid by a company to its shareholders. Public companies that are doing well, often distribute money from their net income back to their shareholders based on the number of shares they hold. Essentially, the company divides its total number of dividends by the total number of shares.
A “dividend” is money from a company’s net profits that are paid out regularly to shareholders. Typically, these payments are made on a quarterly basis. Companies will usually use the dividend from the most recent quarter to estimate how much they should be giving. However, some companies will increase their dividends. This can be a signal to shareholders that the company believes it is doing well and projects sustainable growth.
This calculation is extremely important to the shareholders since these dividends become cash flow for them. Using the dividend per share formula is a clear and fairly accurate way for them to estimate their dividend payments. It is also a way for the business to estimate how much they can pay per share based on their net profits.
Dividend Per Share Formula
If you have any one-time dividend payments during a period that are not part of the regular payment cycle, you would subtract that amount from the total number of dividends paid:
The number of shares is referred to as “outstanding shares” and this is the total of all shares currently held by shareholders. The number of outstanding shares will likely change constantly with the fluctuating market.
In total, a company only has so many shares they are allowed to issue. This amount is known as the number of Authorized Shares. There are two types of shares: restricted and floating shares. Floating shares can be bought or sold by the public without restraint. Restricted shares, on the other hand, are shares that can’t be bought or sold without permission. Some of these are often included as part of a benefits package for employees.
If a company wanted to increase the number of shares it offered, it must be approved first through a shareholders’ vote.
Most publicly traded companies will keep a portion of the stocks for themselves – often the largest portion. Having the most shares of a company is known as having a “controlling interest” in the company. Companies will keep that amount in reserve to maintain power and control.
Dividend Per Share Example
Mr Clegg has 7 shares of Company X. In the last quarter, the company paid $5000 in dividends to its shareholders. The company has 200 total authorized shares. What should he expect their dividend per share to be?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- Total Amount Paid in Dividends: 5000
- Outstanding Shares: 200
We can apply the values to our variables and calculate the dividend per share:
In this case, the dividend per share amount would be $25 per share.
Through this formula, Mr Clegg can then estimate his earnings. He can simply multiply the result for the DPS formula, $25 per share, by the number of shares he owns, 7. He would be making $175 from his shares in Company X. This is essentially passive income for Mr Clegg since he is earning income off of the money he has previously invested.
He can also evaluate the health of this company based on these dividends. If the company chose to distribute $6000 in dividends this quarter (increasing by $1000 from last quarter), it would show that they would be growing. They would be, in essence, saying they were doing well enough to sustain this increase from now on. If the dividends decreased, it might be a sign that things are not going well at Company X. At that point, Mr Clegg might choose to sell his shares or ride out the shift, believing the company will recover and be profitable again.
Dividend Per Share Analysis
The DPS calculation is an accurate way to tell how much the shareholders will get paid. However, looking at the trend of dividend payments can tell us a lot about that specific company and its growth. The higher the dividends from the company, the better they are projected to do.
There are a lot of factors that might influence the health of a company and its ability to distribute dividends to its shareholders. Some of these factors can include debt obligations, growth needs, or simply the dividend policy itself.
Another issue can be how stable the company’s earnings are. A company might be doing well but could have a volatile rate of income that fluctuates often. In this instance, the company might not be willing to commit to higher dividends consistently because the future is unpredictable. They wouldn’t want to worry shareholders by having the dividends fluctuate that much between quarters.
Instead, companies can opt to dole out a one-time dividend payment, also known as an “extra” or “special” dividend. This can provide the shareholders with additional cash flow (keeping them happy) without having to commit to an indefinite increase. Because of this, these extra dividends tend to be more substantial payments. However, these extra amounts are not included in the consistent dividends per share, usually paid quarterly.
Dividend Per Share Conclusion
- Dividend per share is an amount of money paid by a company to its shareholders.
- Any one-time dividend payments are subtracted from the amount from the total amount paid in dividends.
- The DPS calculation requires two variables: the total dividends paid and the outstanding shares.
- The outstanding shares are the total of all shares currently held by shareholders.
Dividend Per Share Calculator
You can use the dividend per share calculator below to get a quick projection of what the shareholders would get paid for each share by entering the required numbers.
1. What is a dividend per share?
The dividend per share is the amount of money paid by a company to its shareholders. This amount is usually paid out on a quarterly basis.
2. How do I calculate the dividend per share?
To calculate the dividend per share, you need to know the total dividends paid and the outstanding shares. The outstanding shares are the total of all shares currently held by shareholders.
The formula to calculate the dividend per share is:
DPS = Dividends / Number of Shares
3. What is an example of a dividend per share calculation?
An example of a dividend per share calculation would be:
Dividends Paid: $100,000
Number of Shares Outstanding: 10,000
DPS = Dividends Paid / Number of Shares Outstanding
= $10.00 / 10,000
4. Why is it important to know the dividend per share?
The dividend per share is important because it can give shareholders an idea of how much money they will be making from their investment. It can also help to evaluate the health of a company.
If the dividends are increasing, it usually means that the company is doing well. If the dividends are decreasing, it might be a sign that things are not going well at the company.
5. What is a good dividend per share?
Generally, 2% to 6% is a good dividend per share. This means that the company is paying out between $0.02 and $0.06 for every share that is outstanding. However, this can vary depending on the company and its situation.